Ahh, the first purchase of the month. Always an exciting time. I don’t know about you, but I really love taking a hefty chunk of capital and putting it to work with a high quality company. Some people prefer putting money to work on new clothes or a fancy trip. The former builds my passive income stream thereby slowly buying myself freedom while the latter guarantees me continuous servitude as mounting bills require more work to pay for. I guess you could say I’m a simple guy with simple needs, but I’d say wanting complete freedom is actually quite ambitious.
I could have chosen to hold on to my capital a little longer as the ongoing government shutdown continues to bring the broader market down, and with it many high quality stocks. However, I always choose to ignore the noise and buy fundamental strength on transient weakness. Having a vision for the long-term is required when investing in equities and my sense of sight has never been stronger.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 20 shares of Exxon Mobil Corporation (XOM) on 10/7/13 for $86.00 per share.
XOM needs no introduction, but just in case you’ve been living under a rock it’s the largest publicly traded integrated oil and gas company in the world. They are involved in the exploration and production of crude oil and natural gas, manufacture of petroleum products and transportation as well as sale of crude oil, natural gas and petroleum products.
Exxon Mobil is attractive on many different fronts. Their scale allows them to leverage their massive size into projects that are too capital intensive for smaller firms. This is a company that had just over $482 billion in revenue for 2012. Earnings came out to $44.9 billion last year. These are just huge numbers. Revenue has a compound annual growth rate of 7.73% from 2003-2012, while EPS has a CAGR of 13.31% during this time period.
Being fully integrated also allows them to leverage exploration when oil prices are advantageous and conversely focus on downstream operations when oil prices soften. This diversification is something that has helped a company operating in an otherwise cyclical industry to retain such a long dividend growth streak.
Not only is this company humongous in scale, but they’re great at operating at a high level. They take safety extremely seriously, falling well below their benchmark in terms of incident rates. They blow away competitors in terms of return on capital employed. They were able to achieve a replacement reserves rate of 115% throughout 2012. They’ll likely continue posting great numbers going forward with 31 major project start-ups between 2012 and 2017. Continuous reinvestment back into the business ensures XOM has a great chance at remaining highly profitable for the foreseeable future.
Exxon Mobil isn’t just reinvesting capital back into the business; XOM is one of the best companies in the world at returning value to shareholders. Since 2000, the company has reduced the shares outstanding by 35%. The company spent $20 billion on share buybacks during 2012. In addition, they have 31 consecutive years of dividend growth under their belt. The 10-year dividend growth rate stands at 9%, but it appears the company is increasing this pace with the most recent raise being 10.5%.
Obviously, as with my recent investment in BP plc (BP), an investment in an oil major is attractive as a play on the increasing consumption of energy worldwide. The global population continues to increase and as real incomes rise we’ll continue to see new consumers able to use their newfound purchasing power to buy bigger homes, cars and other middle class luxuries, all of which require more energy to sustain.
The entry yield on my purchase price is 2.93%, which is rather high for XOM historically speaking. The company continues to have a low payout ratio at just over 31%, which allows them to raise the dividend in the high single digits easily while still keeping a low payout ratio due to earnings historically rising faster than the dividend has been growing.
XOM appears to be trading below fair value here. Shares are currently spotting a 10.7 P/E ratio, which is just a bit under its 5-year average of 11.1. I valued the shares using a Dividend Discount Model analysis using a 10% discount rate and a 7% long-term growth rate, which gives me a fair value of $90. I’m always interested in buying an ownership position in a world-class enterprise at a price below what I should probably be paying. Of course, the bigger the spread the better. All in all, I’m happy with my purchase of XOM shares. I’ve gained a piece of a global energy leader that operates at a very high level while also being one of the most prodigious returners of capital to shareholders.
This purchase will add $50.40 to my annual dividend income based on the current payout.
This is the 42nd position in my portfolio, as this was a new investment.
Some current analyst opinions on my recent purchase:
*Morningstar rates XOM as a 4/5 star valuation with a fair value estimate of $97.00.
*S&P Capital IQ rates XOM as a 4/5 star Buy with a fair value calculation of $91.20.
I’ll update my Freedom Fund in early November to reflect my recent addition.
Full Disclosure: Long BP, XOM
How about you? Buying XOM at today’s prices?
Thanks for reading.